NS&I bond threat to banks

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NS&I launched a range of new accounts, including a one-year fixed bond paying out 3.95% gross interest — a full 0.20% above its nearest rival in the best buy tables.

It also assures the safety of up to £1 million locked away in the accounts, far more than the £50,000 protected under the Financial Services Authority (FSA)'s compensation scheme at most other institutions.

Financial advisors today said the deal was good news for savers but a "questionable" move by a Government-sponsored provider.

Andrew Hagger of Moneynet called the new rates an "aggressive attempt to attract retail savings". He said they would difficult for rivals to compete with, especially building societies "who have been fighting hard to attract new customer funds as they seek an alternative source to the money markets".

Meanwhile, independent financial advisor Jason Witcombe of Evolve Financial Planning noted the one-year bond will pay out almost 3.5 times the Bank of England's base rate.

He added: "A deal offered at such a large premium above base rate and the interbank lending rate, Libor, will be difficult for the privately-owned banks to compete with — they would effectively be forced to buy business."